Financial companies will be hard-pressed to meet long-term growth
expectations as decades of credit expansion come to an end and
central-bank policies and tighter regulations squeeze profits,
according to bond investor Bill Gross.
Banks such Citigroup Inc., Bank of America Corp., Credit Suisse
Group AG, Deutsche Bank AG and Goldman Sachs Group Inc. are trading
far below their pre-crisis highs as the credit growth that has
fueled the global economic expansion in the past appears to near its
end, Gross said in his monthly outlook posted Thursday. The recent
selloff in global bank stocks shows investors recognize that future
returns on equity for the industry “will be much akin to a utility
stock,” he said.
“Banking/finance seems to be either a screaming sector ready to
be bought or a permanently damaged victim of write- offs, tighter
regulation and significantly lower future margins,” wrote Gross,
co-manager of the $1.26 billion Janus Global Unconstrained Bond
Fund. “I’ll vote for the latter.”
Gross likened the troubles of the financial system as a driver of
economic growth to the inevitable demise of the sun. It’s a climate
that’s also challenging for insurers and pension funds, according to
the 71-year-old billionaire, who joined Janus in 2014 after decades
at Pacific Investment Management Co.
‘Like The Sun’
“You should be aware that our finance based economic system —
which like the sun has provided life and productive growth for a
long, long time — is running out of fuel and that its remaining
time span is something less than 5 billion years,” he said.
The 89-member Standard & Poor’s 500 Financials Index was down
7.9 percent this year through yesterday, compared with a drop of
2.8 percent for the full S&P 500 Index.
Insurance companies may struggle to meet liabilities for
storm, accident and death coverage because of slowing investment
returns, he wrote. They “cannot cover claims as conveniently as
they could in the past” because of smaller gains from stocks and
bonds.
The low-rate environment has also made it harder for pension
funds to meet obligations in places such as Puerto Rico and
Detroit, he wrote. And households are struggling to save for
college, retirement or medical emergencies.
Along with bank stocks, Gross recommends avoiding high- yield
debt and “momentum driven investments” such as German Bunds and
long-term U.S. Treasuries, which can become volatile at a time
when central bankers in Europe and Japan are pushing interest
rates into negative territory.
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